Tucked within this wide-ranging legislation are proposed amendments to the Landlord and Tenant Act 1954 (the 1954 Act), which will prohibit upwards only rent review (UORR) clauses in new business tenancies. If this becomes law, it will mark a fundamental change for landlords, investors and lenders who have long relied on the predictability and security of UORRs in commercial leases.
This note provides an overview of the proposed legislation, its practical implications and the potential impact on property investment, lending and asset management strategies. It is of particular relevance to those with interests in the income stability and valuation of commercial property assets.
When does the prohibition apply?
Business tenancy
The ban applies to business tenancies (as defined by the 1954 Act) regardless of whether the tenancy is contracted out. Although the government’s focus is on the high street, the proposals are not limited to any particular sector and therefore the ban will apply to business tenancies of offices, retail, industrial and other commercial premises.
Since the ban is linked to the definition of a business tenancy under the 1954 Act, as currently drafted, it applies to occupational leases and not to headleases or intermediate leases. This could have interesting consequences where there are chains of leases, potentially creating income gaps where an occupational tenant pays a reduced rent after a review, which is less than the amount the landlord is required to pay.
Timing
The ban applies to leases granted after the prohibition comes into force. Existing leases and leases entered into pursuant to pre-commencement agreements for lease are unaffected. Renewal leases entered into after commencement will be caught by the prohibition.
Relevant rent review terms
The lease must contain a provision for the rent to be increased to an amount which cannot be determined at the outset of the lease. The ban will affect leases which contain open market, index-linked and turnover-based rent review provisions. Fixed or stepped rents which are pre-agreed are not caught by the ban.
Relevant review mechanism
The method for determining the new rent must include both (a) a “reference amount” (calculated by reference to e.g., the open market, inflation, an index or tenant turnover) and (b) the possibility that the new rent could differ from the reference amount.
What is prohibited?
When the prohibition applies, any UORR provision will have no effect. Instead, the reviewed rent will be the reference amount—in the case of an open market rent review, the open market rent and in the case of an indexed linked rent review, the index linked amount.
Are there any exceptions?
The secretary of state is empowered to make regulations providing for exceptions. The explanatory notes to the Bill suggest that such regulations could modify the application of the ban and that this may “include exceptions to allow for caps and collars to be used in a commercial lease, and the parameters for their use”. However, no exceptions have been specified at this stage.
Are there anti-avoidance measures?
The legislation contains robust anti-avoidance provisions. Any agreement (whether in a tenancy document or not) is invalid if it tries to make the tenant pay for an increase in rent which would otherwise be prevented by operation of the ban. In order to ensure that landlords cannot prevent rent reviews from taking place where the rent is likely to fall, tenants will also be given the right to trigger rent reviews and take necessary actions to ensure reviews are conducted (even if the lease purports to reserve these rights to the landlord). Equivalent provisions in relation to put options are also included in the Bill.
Market impact and practical implications for investors and lenders
Valuation and income predictability:
The removal of UORRs will introduce greater variability in rental income streams. This may affect property valuations and business models, particularly for assets where long-term, inflation-proofed income is a key investment driver. Yields on assets where there is greater income uncertainty could be pushed up. In the short term, there could be a divergence in the market with pre-commencement assets on long leases commanding a premium.
Financing considerations:
Lenders may need to reassess risk models and loan covenants, as the predictability of rental uplifts is diminished. The risk of downward rent adjustments at review could impact debt service coverage ratios and alter loan-to-value calculations and requirements.
Investment appetite:
The change has the potential to deter some institutional and overseas investors who prioritise stable, upward-only income. It remains to be seen whether this materialises and impacts inward investment and liquidity in the UK commercial property market. Interestingly, although in a different economic place at the time, when similar changes were introduced in Ireland in 2010, some short-term volatility resulted while investors determined the impact on rental values but investment volumes were not fundamentally altered in the long term.
Lease structuring:
Landlords may respond by favouring shorter contracted out leases (to retain greater control over rent increase through open negotiation). Alternatively, the possibility of a downward review may be reflected in the initial rent set. Fixed or stepped rents, indexed rents or alternative rent mechanisms may also become more common.
Asset management:
Greater emphasis may need to be placed on proactive asset management to maintain occupancy and higher rent on relettings/renewals, as landlords will no longer be able to rely on automatic rent increases to generate growth. Indeed, the prominence of the proposal means that, even prior to its enactment, upward or downward rent reviews are likely to become a key topic in lease discussions.
Next steps
The Bill is at an early stage in the legislative process, with no set date for the second reading. The government did not consult the property industry in advance and significant debate and potential amendments are therefore expected. Real estate investors and lenders should closely monitor developments, review their portfolios and pipeline deals and seek advice on structuring new leases in anticipation of the new regime.
Key takeaways for real estate investors and lenders
- The ban on UORRs will apply to all new business tenancies and renewals post-commencement, but not to existing leases.
- Fixed and stepped rent increases remain lawful; only mechanisms that prevent rent from falling are prohibited.
- Robust anti-avoidance provisions mean creative workarounds (such side payments) are unlikely to be effective. Tenants will also be empowered to trigger and progress rent reviews, closing off landlord inaction as a loophole.
- The change may impact property valuations, lending criteria, and investment strategies—early engagement with and by valuers and lenders is recommended.
- Landlords should review pipeline transactions and consider whether to accelerate agreements for lease to fall outside the new regime.
- Market consultation and lobbying are ongoing. The final form of the legislation is likely to evolve as it passes through parliament. Ongoing monitoring of the Bill’s progress and engagement with industry bodies is essential.
